Why energy investors should watch natural gas storage inventories

Every week, the U.S. Energy Information Administration (or EIA) reports figures on natural gas inventories, or the amount of natural gas stored in facilities across the U.S. The markets monitor these figures because inventory data can indicate supply and demand trends. If the increase in natural gas inventories is more than expected, then it implies either greater supply or weaker demand and is bearish for natural gas prices. If the increase in natural gas inventories is less than expected, then it implies either weaker supply or greater demand and is bullish for natural gas prices.

Natural gas prices directly affect earnings for gas-weighted producers such as Chesapeake Energy Corporation (CHK), EQT Corporation (EQT), Southwestern Energy Company (SWN), and Range Resources Corporation (RRC). Many of these producers are components of energy exchange-traded funds (or ETFs) such as the SPDR S&P Oil and Gas Exploration and Production ETF (XOP).

Background: The seasonality of natural gas inventories

Natural gas use is highest in the winter because homes need fuel for heating. So, natural gas storage levels generally increase through the fall and start decreasing in late October or early November, when the winter heating season begins. U.S. natural gas storage levels generally decrease until late March or early April, when the weather starts to warm up again.

The summer also sees some increased natural gas use because the fuel is used to generate electricity. The use of natural gas can increase during periods of hot temperatures because cooling devices such as air conditioners use electricity. During the summer, natural gas inventories generally increase—but at a slower pace than during spring and fall, the “shoulder seasons.”

Read the next part of this series to learn why natural gas inventories caused gas prices to fall.

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